Retail confidence hit as Woolworths reports a bleak Christmas

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The first proof that retailers struggled during the crucial Christmas period emerged yesterday when Woolworths and House of Fraser issued profits warnings.

The first proof that retailers struggled during the crucial Christmas period emerged yesterday when Woolworths and House of Fraser issued profits warnings.

Both companies admitted disappointing sales had forced them to bring forward their scheduled trading updates, knocking confidence across the sector. Shares in Woolworths fell 6 per cent to 37.75p, while House of Fraser's stock slipped 1.5p to 114.75p.

Woolworths said underlying sales at its core chain were flat during the four weeks to 1 January - when it makes most of its profits. At House of Fraser, like-for-like sales fell 1.3 per cent for the half to 3 January. Neither group expects to grow its bottom line this year.

Amid a welter of speculation that Christmas would be bad, the Financial Services Authority warned retailers to act quickly if they felt the festive season had been disappointing. The City watchdog wrote to every FTSE 350 retailer, warning that if December was bad, they were obliged to update the stock market immediately.

Shares in The Body Shop, Boots and WH Smith slumped yesterday, as investors tried to guess which group would be next to disappoint.

Trevor Bish-Jones, the chief executive of Woolworths, said weak demand for toys and entertainment had hit its sales. He blamed the lack of one "must-have" mass-market toy, an unappealing music release schedule and a shortage of computer games consoles for the poor performance from its core chain. DVDs also fared badly, despite the release of box office hits such as Shrek 2, Spiderman 2 and Harry Potter and the Prisoner of Azkaban. "The market for those titles nearly halved," Mr Bish-Jones said, adding: "I think what's happened is piracy. That took the top off those mega releases."

The company's joint broker, Cazenove, slashed its pre-tax profits estimate by 18 per cent to £68m. It also cut its 2006 forecast to £75m from £93m. "In our view the recent weakening of retail demand is the start of a sustained trend rather than a blip," it said.

John Coleman, the chief executive of House of Fraser, said: "The whole season is less good than we hoped. The consumer has been a bit less buoyant."

The department store group's homeware sales were its main weakness, which Mr Coleman said reflected the slowing property market. Fashion and beauty fared better, leaving the group with less stock to put into its annual clearance sale. It had 20 per cent less fashion stock left after Christmas compared with the previous year, helping it to protect its gross margin, which edged ahead. It expects underlying profits to match last year's £27m - against consensus expectations of up to £30m.

For Woolworths, the out-of-town Big W chain that it is scaling back suffered the most, with an 8 per cent fall in like-for-like sales over the Christmas period. Sales at MVC, its music chain, fell 4.7 per cent.

The accelerated decline meant underlying sales for the main high street chain were 1.5 per cent lower for the 48 weeks to 1 January, with the second half likely to have seen sales fall by 2.5 per cent. Gross margins for the combined main chain and Big W are expected to increase by 30 basis points for the full year, thanks to a lid on costs - but even this was only half as good as analysts had hoped.

Mr Bish-Jones said: "It would have been nice to have landed 2 to 3 per cent like-for-likes but we didn't. We could have driven the top line if we'd let the margin disappear."